Here's Why the Latest Federal Reserve Interest Rate Hike May Not Drive Mortgage Rates Up

Home buyers won't necessarily see their borrowing rates climb.

The Federal Reserve has been on a mission to bring inflation down since 2022. To that end, it's been raising its benchmark interest rate aggressively, knowing full well that that's apt to indirectly drive up the cost of consumer borrowing.

See, the Fed wants consumers to start curbing their spending. That's the only way to bring inflation levels downward, as a reduction in demand should allow supply to catch up to it. And it's a disconnect between supply and demand that's been driving inflation upward in the first place.

Meanwhile, on Feb. 1, the Fed raised its benchmark interest rate by 0.25%. That's a smaller increase than recent rate hikes, but an increase nonetheless. And now, the fear is that it will cost consumers more to borrow money, whether in the form of credit card balances or personal loans.

But those looking to sign a mortgage loan may not necessarily see their costs rise on the heels of this latest rate hike. Even though the Fed's actions could influence mortgage rates, those rates tend to have a mind of their own.

Mortgage rates tend to follow their own pattern

Last year, the Fed didn't begin raising its benchmark interest rate until March. And when it did, it announced a modest rate hike of 0.25%. It wasn't until June that the central bank hiked up interest rates by a rather aggressive 0.75%.

Meanwhile, as of the end of 2021, the average 30-year mortgage rate was just over 3%. By the end of January, it was around 3.5%. And by May, it was well over 5%.

All told, mortgage rates managed to rise significantly in 2022 before the Fed's first aggressive interest rate hike was announced. And that lends to the argument that mortgage rates don't tend to be as influenced by the Fed's rate hikes as other borrowing products. As such, the Fed's most recent rate hike may not drive mortgage rates up at all.

That's a good thing, because as of late January, the average 30-year mortgage rate was still over 6%. That's an improvement from the fall of 2022, when that same home loan product topped 7%. But it's about twice the rate borrowers would've been facing at the start of 2022.

Mortgage rates could rise or fall this year

In light of all of this, a clear question comes to mind: What does 2023 have in store for mortgage rates? And the answer is that it's really hard to say.

There's a good chance mortgage rates will continue to slowly creep downward as the year progresses. But we could see rates rise along the way, too.

One thing that's not likely in the world of mortgages is getting back to rates in the 3% range for 30-year loans. But could rates fall to or below 5% in 2023? That's a possibility.

Ultimately, prospective home buyers will have to wait and see. But those looking to purchase a home in the near term also don't necessarily need to panic over the Fed's latest rate hike.